Sri Lankan default impact on Pakistani banks

Sri Lankan default impact on Pakistani banks

KARACHI: Pakistani banks operating in Sri Lanka will have adverse effect on their books due to declaration of Sri Lanka for failure to repay its foreign debt.

In a recent development, Sri Lanka announced that it would be defaulting on its external obligations due to dwindling foreign exchange reserves.

Sri Lanka’s total external debt currently stands at $51 billion, i.e. 60 per cent of GDP.

As per foreign news agency, Sri-Lanka has to make a foreign repayment of $4 billion, including $1 billion sovereign bond maturing in July 2022.

Insight Securities said that its banking universe including UBL, MCB, HBL, and BAHL holds Sri Lanka sovereign instruments in their investment book (both USD denominated & Local currency), may result in revaluation loss or provision charge.

Sri-Lanka’s central bank governor said that this suspension of payment would be placed until the country reaches an agreement with creditors and alongside with the International Monetary Fund (IMF).

The analysts believed that this declaration of default will only affect USD denominated bonds while the CBSL (Central bank of Sri Lanka) will continue to honor domestic bonds i.e. T-bills. However, disclosure of local and USD-denominated sovereign bonds is not available in respective banks financials.

It is worth mentioning that these above abstracts are based on the CY21 financial statement, and there is a possibility that these banks have already reduced their exposure before the default announcement.

Analysts at Arif Habib Limited said that the economic crisis in Sri Lanka seems to be worsening with the authorities announcing temporarily default on its foreign debts.

With more than $50 billion in external debt and foreign exchange reserves hovering around $1.9 billion (last month), the country is currently struggling to make payments on its international sovereign bonds.

Media sources suggest, this week $36 million interest payment is due on a Sri-Lanka’s 2023 dollar bond as well as $42.2 million on 2028 note.

Moreover, a $1 billion sovereign bond is maturing on July 25th, 2022.

The extraordinary measure taken by the Sri-Lankan authorities to halt payments on foreign debt is to preserve its dwindling reserves for the purpose of importation of essentials such as food, fuel and medicine.

Going forward, the analysts believe, the options available to the Sri-Lankan government include: negotiation of a settlement in which bondholders are given new bonds that are worth less but help provide some partial compensation, or restructuring of the current one with the support of IMF which media sources claim to be likely Sri Lanka’s strategy.

It is pertinent to note here that some of the Pakistani banks are exposed to the Sri-Lankan economy either through branch banking or investments in the government debt securities.

Amongst our AHL coverage banks, MCB has eight branches in the Lankan territory while HBL operates with three branches in the country.